No Kings protests: Amid tariff turmoil, what pain points are emerging in US economy, why things could get worse

Surging car prices in the US

For the first time ever, the average cost of a new car in the US has topped $50,000, which is, in part, down to Trump’s tariffs. Experts warn of an even bigger hit on prices next year, as these tariff effects get more entrenched. Data from Kelley Blue Book Co., an American vehicle valuation and automotive research company, showed that the average transaction price in September in the US tipped above $50,000 after a 4 per cent surge from the same month last year. Kelly Blue Book tracks the average transaction price, before incentives kick in, but the latest surge is seen as significant.

Like the sticker shock faced by carbuyers, other American consumers too are facing some shortages and seeing price hikes in consumer goods in the wake of the Trump tariff upheaval — the biggest rise in tariffs since the 1930s.

But despite Trumponomics being branded as a disaster, Trump’s tariffs haven’t exactly fueled a massive spike in consumer prices yet. And despite all the doomsday predictions, the US economy hasn’t fallen off a cliff.

There are at least three reasons why broad economic metrics in the US still look good.

One, Trump inherited an economy that was growing at over 2 per cent, near full-employment, and subdued inflation. It will take some time to wind down. But that is work-in-progress. In the first half of this year, the US economy grew at an annual rate of 1.1 per cent, which, if one were to ignore the 2020 pandemic, is the most anaemic first half growth since 2012.

Second, importers in the US front-loaded shipments from across countries to beat the tariffs. A lot of items on American retail shelves and the ones sold in recent months do not reflect the tariff incidence, purely because they hit the US shores before the tariffs kicked in. Trump’s repeated waivers and extensions have also helped matters.

Three, the stock markets continue to get tailwinds from America’s extraordinary artificial-intelligence boom, which has pushed up projected earnings for its biggest tech companies over the last 24 months. Tech has an overweight influence on the US markets. Markets also might be expecting Trump to chicken out — on the lines of the widely used acronym TACO, or Trump Always Chickens Out — as the tariffs impact become evident. The lack of a reaction so far might be emboldening him to push ahead.

While key economic data offers a somewhat subjective picture, with inflation having so far defied the worst of economists’ expectations even as the US consumer remains strong, there are clear signs of pockets of weakness in the labour market and a slowdown in growth.

The red flags include the firing of Erika McEntarfer, the Commissioner of the Bureau of Labor Statistics (BLS) on August 1, after the agency said that non-farm payrolls — or new jobs outside of agriculture — rose by just 73,000 in July, while the numbers for the previous two months were revised downwards by more than a quarter of a million to a mere 19,000 for May and 14,000 for June. The US President claimed the numbers were being “rigged” to make him and his Republican party “look bad”.

Serious flaws

There are some fundamental flaws in Trump’s worldview that could impact the American economy in the months to come. The stated aim of Trump’s tariffs — reshoring manufacturing and creating jobs back in the US — is difficult to achieve given America’s loss of competitiveness, especially in labour-intensive industries.

Higher import costs will progressively feed into prices in the US; costlier goods will dent consumption, and with weaker demand, job creation will taper off. These strains are likely to become more pronounced during the Fall-Winter/Christmas shopping season, potentially shaping voter sentiment in the run-up to the midterm elections.

Despite doomsday predictions, the reasons for the better performance so far this year “are clear,” IMF chief economist Pierre-Olivier Gourinchas said in a blog post last week. “The United States negotiated trade deals with various countries and provided multiple exemptions,” Gourinchas said. “Most countries refrained from retaliation, keeping instead the trading system largely open. The private sector also proved agile, front-loading imports and speedily re-routing supply chains.” Yet many of those factors only reflect “temporary relief, rather than underlying strength in economic fundamentals,” the IMF said in the report.

Given that the Trump administration has significantly hiked tariffs on virtually all US trading partners, with some major economies such as the European Union, Japan and South Korea facing a 15 per cent tariff while others including Canada, Switzerland, Brazil and India facing much higher rates, upwards of 35 to 50 per cent, unless a deal is reached for each of the key trading partners, the average tariffs charged by the US on its imports would be somewhere in the 15-20 per cent range. In January, the effective average US tariff figure was 3 per cent. For the US, this entire exercise would be inflationary, even if importers or retailers were to bear part of the costs.

Also, an estimate put out earlier this month by Goldman Sachs showed that some impact of the tariffs have not reached the end consumers in full measure, given that 51 per cent of the tariffs so far have been absorbed by American businesses in their margins, But the amount that is being passed on to consumers is ticking up over time, which could mean more pain could follow in the coming months.

Like with cars, the effects of inflation are starting to show up in the most likely of areas, with reports of retail majors such as Costco and Walmart hiking prices of appliances, furniture, tools and children’s items.

Also, while the US Gross Domestic Product, or GDP, has been slowing, the big resilience factor has been strong consumer spending — especially the top 10 per cent of well-heeled Americans who are also the biggest gainers of the AI-driven stock market resilience. But much of this spending resilience was on account of goods that were imported on a front-loaded basis. There is the possibility of a sharp slowdown going forward, and while a recession is not on the cards yet, a slowdown is looming.

Apart from tariffs, there are concerns around Trump’s tax bill and how that will impact the US deficit. Some of this concern was reflected on August 6, when the 10-year American Treasury yield rose following a somewhat dismal $42 billion auction of new securities by the US Treasury Department. The benchmark 10-year note yield has been well above 4.2 per cent, while the 30-year Treasury bond yield too has stayed above 4 basis points, according to Reuters data. One basis point equals one hundredth of a percentage point, and yields and prices move in opposite directions.

The US Federal Reserve, the country’s central bank, has a dual mandate of ensuring price stability and maximum employment. The Fed chief Jerome Powell, who is under fire from Trump for not cutting rates, is ironically faced with a two-sided risk now, a threat to both its goals. Inflation is set to rise while employment numbers are likely to taper off. After the Fed unexpectedly yielded to Trump’s demands and cut rates in September, the challenge now for Powell is to keep its benchmark interest rate high enough to check rising inflation, without denting the already shaky job market.

The coming months would be more unpredictable, and the impact of Trump’s fickle tariff outlook could actually start showing up as business owners begin to make educated decisions about how much they actually have to increase prices. Whereas once American shoppers were spoiled for choice, now firms that succeed in the post-Trump regime will do so not only because they are the most innovative or efficient, but because they are good at gaming the system or lobbying for sops. Fortunes will be spent on lobbying, and that makes it difficult to remove any of these tariffs even after a new administration takes office.

So, the high tariff US external outlook is likely to fester even beyond Trump.